Life and mortgage insurer Genworth Financial Inc (GNW) said on Sunday it applied for capital under a U.S. government program after reaching a deal to buy a bank and requesting savings and loan company status.

With the move, Genworth joins property and casualty insurer Hartford Financial Services Group Inc (HIG) in changing its regulatory status to participate in the Treasury Department's $700 billion Troubled Asset Relief Program (TARP).

Earlier this month, Genworth reported a $258 million net loss for the third quarter and its operating profit missed Wall Street expectations. It also suspended a share buyback plan, withdrew a previous forecast for 2008 operating profit, and said it was exploring ways to bolster capital.

The Hartford Financial Services Group, Inc. (NYSE: HIG) today announced that it has applied to the Office of Thrift Supervision to become a savings and loan holding company and has applied to participate in the U.S. Treasury Department’s Capital Purchase Program.

In conjunction with these applications, The Hartford has signed a merger agreement to acquire the parent company of Federal Trust Bank for approximately $10 million and will also provide an additional amount to recapitalize the bank.

CIT Group (CIT) said on Thursday that it had applied to become a bank holding company and would seek capital under the U.S. government's program to fund banks, sending the commercial finance company's shares soaring as much as 26 percent.

New York-based CIT said it hoped that once it has approval to convert its charter from an industrial bank to a Utah state bank, it will qualify for funds from the U.S. government's Troubled Assets Relief Program, which is injecting about $250 billion of capital into U.S. banks.

"This is not a cure-all for stemming credit losses," said BMO Capital Markets analyst David Chiaverini. "It will help in absorbing those losses, but it won't change the fundamentals, which are decidedly weakening."

The program was initially intended to provide capital to healthy financial institutions. As recently as October 21, U.S. Treasury Secretary Henry Paulson said in a television interview: "We are not going to use this money to prop up failing banks."

American Express, the nation’s last big independent credit card company, said late Monday that it would transform into a bank holding company to strengthen its position in the market turmoil.

Federal Reserve banking regulators said they approved its application because of the “unusual and exigent circumstances” roiling financial markets and the company’s interest in tapping up to $3.8 billion in government money. As a full-fledged bank, American Express would gain greater access to the Treasury Department’s bailout plan for banks, a move that might allow it to lend more freely and perhaps acquire a larger deposit-taking institution.

American Express customers are unlikely to notice the changes. But Monday’s announcement may also represent the end of financial companies operating a single line of business and depending on the capital markets for financing.

Goldman Sachs and Morgan Stanley recently transformed themselves from investment banks to bank holding companies after being battered by the markets. Big lenders like GMAC, the finance company partly owned by General Motors, and General Electric’s financial subsidiary have similarly been considering becoming banks.

Regional investment bank Raymond James Financial is taking a page out of Morgan Stanley and Goldman Sachs' book.

The new lead dog in the ever-changing investment banking pantheon is seeking to get approval to convert itself into a bank holding company.

News that Raymond James is aiming for a bank holding company status, first reported by the St. Petersburg Times, follows an announcement from the Federal Reserve last weekend that Morgan Stanley and Goldman had received approval to change from high-flying investment into more closely scrutinized commercial banks. Both will face slimmed down profits in addition to more federal oversight.

With Morgan and Goldman shedding their investment bank status and Merrill Lynch, Lehman Brothers and Bear Stearns either going out of business or being acquired, the St. Petersburg, Fla.-based Raymond James found itself in the enviable position of being the largest investment bank - a title it's expected to now relinquish.

A bank holding company is a company with significant ownership of one or more banks.

Bank holding companies are required to register with the Board of Governors of the Federal Reserve System. Bank holding companies are subject to the Bank Holding Company Act of 1956.

New or smaller banks often re-structure themselves into bank holding companies to take advantage of the greater financial flexibility this corporate and legal status permits. Becoming a bank holding company makes it easier for the firm to raise capital than as a traditional bank. The holding company can assume debt of shareholders on a tax free basis, borrow money, acquire other banks and non-bank entities more easily, and issue stock with greater regulatory ease. It also has a greater legal authority to conduct share repurchases of own stock.

The downside includes responding to an additional regulatory authorities, especially if there are more than 300 shareholders, at which point the bank holding company is forced to register with the Securities and Exchange Commission. There are also added expenses of operating with an extra layer of administration.

We're All Banks Now

Is there any financial institution that does not want to become a bank or a bank holding company?

Implications of Move to Become Bank Holding Companies

One of the implications of becoming a bank or a bank holding company is is that it puts the entity under Fed regulation. That means that Goldman, Morgan Stanley, Merrill Lynch (via merger with Bank of America) and any other nonbank becoming a bank holding company is going to have to reduce leverage. Kiss those 30-1 and 40-1 leverage ratios goodbye.

Furthermore, it is highly likely that the ability for banks to hold off balance sheets SIVs will be regulated away. This is a good thing as with reduced leverage comes reduce risk.

However, reduced risk means reduced profit potential. When the economy does pick back up, don't expect profits at banks and bank holding companies to come remotely close to the earnings during the last cycle.

Peak Earnings

One of the implications of Peak Credit is that financial earnings have peaked. And because of reduced leverage, earnings in the financial sector are not coming back for decades. Those earnings were all a mirage in the first place.

Next consider homebuilders given that lending standards have dramatically tightened at banks. Those profits are never coming back. What happenes to profits at major pharmaceuticals if and when the Obama administration allows drug imports from Canada and other places?

One must also factor into the earnings equation boomers facing retirement in the wake of falling home prices and retirement accounts taking a cliff dive. Trillions in potential spending power has been wiped off the books.

Expect boomers to travel less than expected, buy fewer toys (boats, cars etc) than expected, gamble less than expected, and downsize much more than expected in every aspect. This in turn will reduce the earnings potential of non-financial corporations for decades to come. Thus expectations that a new rip roaring bull market will commence once the market bottoms is sadly misplaced.

In the meantime, remember that rising unemployment, rising credit card defaults, rising foreclosures, rising numbers of walk aways, and declining earnings of non-financials means we have not even bottomed yet.

This secular bear market will last a lot longer and be much deeper than anyone thinks. Sadly, very few are prepared for it.

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